Investment Perspectives: Global lessons in developing retirement solutions
Why is post-retirement investing so difficult? What do people actually need in retirement? Does any market have the right answer? Around the world, many are asking these questions, and that spurred our research into post-retirement systems with the aim of identifying best-in-class approaches.
We have researched many post-retirement systems around the world. No market has fully
solved the puzzle of a successful post-retirement strategy. The long-term nature and degrees
of uncertainty involved often lead to conflicting objectives, apparently impossible to achieve
The move from Defined Benefit (DB) to Defined Contribution (DC) has transferred the longevity
and investment risks from the plan sponsor to the individual plan member. Without the actuarial cross-subsidies implied by pooling these risks, the danger of outliving one’s savings is significant.
We need to find a better solution to this problem than an early grave.
There are lots of variables in retirement; how long people will live for, the costs of goods and
services they will need, interest rates available on their accumulated savings, and so on.
Faced with this amount of long-term uncertainty, people tend to suffer behavioural biases and often make poor decisions. We believe that retirees need help about what constitutes a good quality retirement solution to help nudge them in the right direction.
Politics plays a significant, and often unhelpful, role. Due to election cycles and partisanship,
politicians often have far shorter time horizons than retirement savers, and the most popular,
vote-winning policies are not always the most suitable in the long term.
The merry-go-round of post-retirement systems around the world, demonstrating ‘progress’ by politicians, does not help retirees in the long term. Any solution must have long-term cross-party support or, even better, complete isolation from political interference.
We observe that there have been insufficient contributions made into DC plans in the majority
of countries we have researched. Our key conclusions are that, in addition to sufficiency of
pre-retirement savings, a successful post-retirement strategy requires:
- Stable, real investment returns, net of costs
- Reliable protection against longevity risk, particularly later in life
- Flexibility to adapt to changing requirements
- Simplicity in implementation and communication of outcomes.
A successful solution will inevitably be a blend of investment and insurance components in
a balanced manner. With lengthening life expectancies, we anticipate strategies will blend a
growth and income account-based approach for the first 15-20 years after retirement with
longevity protection engaging in later life. However, an over-arching solution is far broader than
simply a fund or insurance product.